To Inform:

A little more than halfway into the year, I thought it would be interesting to revisit one of the themes we flagged at the beginning of the year and see how it is playing out. Our “Rates Higher for Longer for Longer” theme was written with a certain cheekiness, with an extra “for longer.” When rates began rising in 2022, there was an expectation from some market prognosticators that, longer-term, the multi-decade downward trend in interest rates would reassert itself once the immediate inflation shock of 2022 was over. We weren’t seeing as much talk about the possibility that this increase in interest rates could be sticky throughout the 2020s as it is now looking apparent.

When discussing this theme at the outset of the year, we shared a few factors that we felt were supportive of higher rates “for longer for longer.” Government deficits, a cautious Fed with respect to inflation, and an ongoing economic expansion were, in our view, fuel for higher rates. Thus far in 2026 we’ve seen ongoing deficit spending and, whatever your view on tariffs, a worsening budget deficit given the Supreme Court ruling that scaled back Trump’s tariffs. Inflation, while on a downward trend to begin the year, has picked up again given the Iran-war induced supply shocks. Finally, despite the headlines, we have an economy that continues to grow with a still relatively tight labor market. In a table released at the beginning of the year, researchers at Strategas were forecasting rates to remain at elevated levels throughout 2026, as seen below. Their rate forecast has largely proven accurate this year, despite several geopolitical developments that few were forecasting.

Source: Strategas

This interest rate theme has impacted the way The Joseph Group’s Investment Committee is allocating assets in client portfolios. In another time, we may have gotten excited about government bonds yielding between 4% and 5% at the long end of the interest rate curve (10 and 30 years). But a world of higher rates with inflation risks to the upside means bonds serve a very different role in portfolios than they do in a world where inflation is well controlled.

The Blackrock chart shared below highlights the performance of the U.S. Aggregate Bond Index in months where the S&P 500 fell by 2% or more. Since 2020, we’ve had 19 months with stocks down 2% or more. In all but one of these months bonds were also negative. In the 19 months from 2010 through 2019 when stocks were down 2% or more, bonds were positive in 15 of those months. Bonds were risk diversifiers in the 2010s but have been risk co-conspirators in the 2020s.

Source: Blackrock

Now, this doesn’t make bonds a bad investment. They are yielding significantly higher coupons than they did in the 2010s. But what we can say is that the diversification benefit of owning bonds is much less than it was. While we believe this is cyclical, such an environment can persist for a long time.

What does that leave an investor to do? In the objectives-based portfolios we have the privilege of managing for clients we’ve been underweight bonds – both high-quality and “junk bonds” – for much of the year. We continue to find alternative strategies to be interesting. Strategies that are less correlated with the stock or bond market can be beneficial when stocks and bonds are moving in the same direction. These alternative strategies invest in a range of things like catastrophe bonds, option-hedged stock portfolios, equity long/short strategies, covered call income strategies, and a host of others that have had a history of generating reasonable returns with lower correlations to stocks and bonds.

Like many other market developments, we have little control over what happens with interest rates and for just how long they may remain at these levels. What we do have control over is how we respond to the interest rate environment and the types of strategies we allocate client dollars towards. We often talk about having an “all-weather” approach to markets. Our goal is and has always been to help clients reach their financial goals in order to live out their great life stories. The tools we use to get there can vary, but we’re confident it can be done!

Written by Alex Durbin, CFA, Chief Investment Officer